DP 14024
DP 14024
14-024
http://ftp.zew.de/pub/zew-docs/dp/dp14024.pdf
Discussion Papers are intended to make results of ZEW research promptly available to other
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The Impact of R&D Subsidies during the Crisis1
a
ZEW Centre for European Economic Research, Mannheim (Germany)
b
Maastricht University (The Netherlands)
c
University of Luxembourg (Luxembourg)
d
K.U. Leuven, Dept. of Managerial Economics, Strategy and Innovation (Belgium)
March 2014
Abstract
This study investigates the impact of R&D subsidies on R&D investment during the
past financial crisis. We conduct a treatment effects analysis and show that R&D
subsidies increased R&D spending among subsidized small and medium sized firms
in Germany during the crisis years. In the first crisis year, the additionality effect
induced by public support was, however, smaller than in other years. This temporary
decrease may be caused by an altered innovation subsidy scheme in crisis years or by
a different innovation investment behavior of the subsidy recipients. We do not find
support for the countercyclical innovation subsidy scheme having caused the smaller
additionality effect and conclude that it is likely to be driven by subsidy recipient
behavior.
1
We thank Benjamin Balsmeier, Martin Carree, Dirk Czarnitzki, Clemens Fuest, Georg Licht, Cindy Lopes Bento,
Bettina Peters and Christian Rammer for helpful comments and Pia Neuer for proofreading. The paper has been
presented at the CISS Summer School 2013, ZEW PhD Workshop 2014 and the DRUID Winter Conference 2014.
1. INTRODUCTION
The global economic crisis of 2008 has hit OECD countries severely. Unemployment has
reached a post-war height of 8.5% in October 2009, GDP declined by 4% (OECD, 2012a) and
countries including Canada, Sweden and the UK (OECD, 2012b, Filipetti and Archibugi,
It is well understood that private sector research and development (R&D) is a main factor of
of private R&D activities can have detrimental consequences in the long run (Grossman and
Helpman, 1991, Aghion and Howitt, 1998). Policymakers in many industrialized countries,
including Austria, Denmark and Sweden, reacted immediately and enhanced R&D spending
2009 as compared to 2007. Between 2010 and 2013 the federal government invested an
additional 12 billion in key areas of education and research (OECD, 2012b). With these
initiatives Germany ranks in a league of its own against an overall pro-cyclical behavior of
public science and technology budgets in OECD countries (Makkonen, 2013). Overall,
Germany belongs to the few countries that experienced a weak increase in R&D despite of the
(OECD, 2012b).
This study aims at evaluating the role of public R&D support during the past economic crisis.
Policymakers are well aware of the importance of private sector R&D and also of the fact that
private R&D spending is lower than socially desirable, even in boom periods. Private R&D
2
investment is below the social optimum because R&D has the characteristics of a public good
and generates positive external effects which cannot be internalized (Arrow, 1962). In
response, projects that would benefit society but do not cover the private cost are not realized.
Governments subsidize R&D in order to make such R&D projects attractive to the private
sector.
increase of R&D in the economy as intended by innovation policy. Due to low application
costs virtually all firms have incentives to submit an application for R&D subsidies, including
firms that would be able to conduct their R&D projects with own financial means. In the case
expenses with public funds. If the majority of subsidized firms would use public funds to
replace private R&D expenses, innovation policy would not stimulate additional private R&D
Public support for R&D activities is particularly important in times of an economic downturn.
With investment in R&D being risky and returns being uncertain and long-term, firms facing
financial constraints due to recessions are likely to reduce their investment in R&D
(Schumpeter, 1939, Freeman et al., 1982). The consequences for the economy and for the
During an economic downturn, incentives for subsidized firms to use the public funds to
substitute private investment are, however, significant. Firms have to cope with the
consequences of a crisis so that the likelihood of a crowding out effect is higher. In addition, it
2
A crowding out effect can be rejected for the vast majority of R&D subsidy programs worldwide (see Zuniga-Vicente et al.,
2014, for a recent survey).
3
has been shown that the responsiveness of companies to policy initiatives is weaker in times
of economic uncertainty (Bloom et al., 2007, Bloom, 2008). This is because uncertainty
increases the real option value of investments making firms more cautious with regards to
Based on firm-level data for Germany, we investigate the effects of the German Federal
Ministry for Education and Researchs (BMBF) public R&D subsidy program on firms R&D
investment in the crisis period. We focus on small and medium-sized enterprises (SMEs)
because these firms are expected to be more vulnerable during an economic downturn than
large enterprises. The sample covers the period of 2006-2010, with 2009 marking the
beginning of the crisis period in Germany as illustrated in Figure 1. Our analysis answers the
following questions: First, we analyze whether R&D subsidies lead to an additionality effect
in terms of R&D investment or whether there is evidence for a crowding out effect. Our
empirical results from a non-parametric propensity score matching indicate that R&D
subsidies lead to an additionality effect in all crisis and non-crisis years. Second, we
investigate whether R&D subsidies have a different effect in the crisis period than in non-
crisis years. Our results show that the effect of subsidies in the crisis year 2009 is - although
positive - significantly smaller than in all other years. The smaller additionality effect in the
innovation policy during the crisis. The budget of the BMBF increased by about 9% in 2009
compared to 2008, which enabled the ministry to subsidize more firms. The additionally
funded firms that only qualify for funding because of the budget increase might be of worse
quality than the subsidy recipients of non-crisis years. A decrease of the average quality of the
subsidized companies could cause a lower additionality effect. An alternative explanation for
the lower additionality effect could be that firms invest less in R&D during the crisis because
4
they face a reduced demand for products and services and higher incentives to substitute
private with public funds. In the last part of the analysis, we hence investigate whether the
smaller additionality effect in the crisis year 2009 is related to an altered innovation subsidy
scheme. We do not find support for firms subsidized in the crisis being of worse quality than
subsidized firms in pre-crisis years. Hence, we reject the hypothesis that an altered innovation
policy caused the decrease in the magnitude of the additionality effect of the crisis. This
leaves us with the alternative explanation that subsidized firms invest less in R&D because
they have to cope with the consequences of the crisis. Although the average additionality
effect per firm is smaller in the first crisis year, the counter-cyclical innovation policy is likely
to have had a stabilizing effect because it helped SMEs to pay the wages of R&D workers and
0
1998 2000 2002 2004 2006 2008 2010 2012
-2
-4
-6
DE FR EU28
5
The remainder of the paper is organized as follows. The next section surveys related
literature. Section 3 presents the empirical strategy. The data set is described in section 4. The
2. LITERATURE REVIEW
search for measures to improve productivity. At the same time, opportunity costs of
reallocating productive assets from manufacturing to R&D are relatively low because of a
limited demand for manufacturing (Stiglitz, 1993, Aghion and Saint-Paul, 1998). This is in
line with the Schumpeterian notion of creative destruction according to which a crisis opens
new opportunities. Systematic innovation can open opportunities for economic activities and
The contrary perspective suggests that innovation behavior is pro-cyclical. Schmookler (1966)
and Shleifer (1986) argue that innovation strongly depends on demand. If demand is low there
is no incentive to introduce new products into the market. Further, R&D is often financed by
the firms free cash flow that depends on the companys current success so that financial
constraints during an economic downturn reduce investment in R&D (Hall 1992, Himmelberg
Prior studies mostly report a pro-cyclical innovation investment behavior. Barlevy (2007)
shows that R&D behaves pro-cyclical, resulting in inefficient R&D investment during
recessions. He suggests that technology leaders should expand their R&D activities during
6
crisis times to disproportionately gain from growth periods. The threat of spillovers to rival
innovators which refrain from own innovation activities in crisis periods, however,
incentivizes technology leaders to shift the bulk of their R&D investment to upswing periods.
Ouyang (2011) examines the opportunity cost hypothesis and finds an asymmetric response of
R&D to demand shocks. A positive demand shock causes R&D expenditures to decrease due
to rising opportunity costs while a negative demand shock decreases R&D investment due to
liquidity constraints. Ouyang (2011) finds that the liquidity constraints effect outweighs the
opportunity cost effect resulting in a pro-cyclical R&D investment behavior. Aghion et al.
(2010, 2012) and Bovha-Padilla (2009) find evidence that credit constrained firms reveal a
higher share of R&D investment during periods of flourishing sales, underpinning the
firms are not credit constrained. Further empirical evidence on innovation behavior and the
business cycle includes Geroski and Walters (1995) who show for the UK that growth
Granger-causes innovation activity. Guellec and Ioannidis (1999) find that the burst of the
Japanese financial bubble and the German unification (as macroeconomic shocks) had a large
negative impact on R&D investment in the respective countries. In contrast to these results,
Saint-Paul (1993) does not find support for either a pro- or counter-cyclical investment
behavior in R&D. The explanation put forward is that the cash-intensive nature of R&D
With regards to the global economic crisis, macroeconomic figures show an overall decline of
innovation activities across OECD countries, whereby different countries are affected by a
different degree (OECD, 2012b). Heterogeneous effects have been found on the firm level as
well. Overall, firms innovation activities declined during the crisis with a few exceptions
3
Aghion et al. (2010) do not investigate specifically the effect on R&D investment but on long-term investment. They argue,
however, that long-term investment could be e.g. R&D investment.
7
comprising some new, fast growing firms and some firms that were highly innovative before
the crisis and sustained a high innovation performance during the crisis (Archibugi et al.,
2013). In addition, a few small firms and new entrants show a greater readiness to swim
against the stream in terms of their innovation strategy after the crisis (Archibugi et al.,
2013). For a sample of Latin American countries, Paunov (2012) shows that many firms
sector the question remains whether and how the government should react. From a Keynesian
perspective there is the clear proposition that the government should stabilize the economy by
increasing its spending during recessions, reducing taxes and shifting its budget towards a
private consumption depends on the degree of substitutability in utility between these two
(Arreaza et al., 1999, Lane, 2003a). If public and private consumption are substitutes,
are separable in utility, the government should seek to perfectly smooth government
countries (Arreaza et al., 1999, Lane 2003a,b, Abbott and Jones, 2012). This is explained by
dispersed political power and output volatility (Lane 2003a, Abbott and Jones, 2011, 2012).
With focus on public science and technology budgets and the past financial crisis, Makkonen
8
(2012) reports a pro-cyclical behavior for the majority of countries in the European Union.
The new member states were affected most, while some countries showed a counter-cyclical
behavior increasing their science and technology budgets during the crisis. The largest
percentage increase in budgets took place in Germany, Luxembourg, Denmark, Estonia and
Portugal (Makkonen, 2012). Countries including Austria, Germany, Denmark and Sweden
reacted to the crisis with targeted R&D initiatives (OECD, 2012b). The German government
devoted to key areas of education and research between 2010 and 2013 (OECD, 2012b). The
empirical part of this paper will investigate the effect of such a counter-cyclical science and
technology policy during the crisis with focus on a direct project R&D subsidy program.
growth and national competitiveness. The success of these policy measures is ex ante unclear
and has to be evaluated ex post since there is an incentive for subsidy recipients to replace
private R&D investment with public funds. A vast literature of ex post evaluation studies
exists for various R&D subsidy programs in different countries. 4 Early surveys are provided
by David et al. (2000) and Klette et al. (2000). The majority of the surveyed studies find that
4
E.g. for Finland (Czarnitzki et al., 2007, Takalo et al. 2008), Flanders (Aerts and Czarnitzki, 2005, Aerts and Schmitt, 2008,
Czarnitzki and Lopes Bento, 2013), France (Duguet, 2004), Germany (Czarnitzki and Fier, 2002, Almus and Czarnitzki,
2003, Hussinger, 2008), Israel (Lach, 2002), Italy (Cerulli and Poti, 2010), Canada (Berube and Mohnen, 2009), Luxembourg
(Czarnitzki and Lopes Bento, 2012), Spain (Busom, 2000, Gonzales et al., 2005, Gonzales and Pazo, 2008, Gelabert et al.,
2008), the AMT (advanced manufacturing technologies) program in Switzerland (Arvanitis et al., 2002), the U.S. SBIR
program (Wallsten, 2000) and the U.S. chemical industry (Finger, 2008), South Africa (Czarnitzki and Lopes Bento, 2012)
and Latin America (Hall and Maffioli, 2008). Most of these studies can rule out a full crowding out effect.
9
The early literature up to the year 2000 is critiqued for disregarding a potential selection bias
of participating firms into R&D subsidy programs. On the one hand, more innovative
companies are more likely to apply for R&D subsidies. On the other hand, these companies
can be more likely to receive the public funds if the government follows a picking the
winner strategy. A simple comparison of subsidized and non-subsidized firms would hence
lead to biased results. The literature since 2000 as surveyed by Cerulli (2010) and Zuniga-
Vincente et al. (2014) takes the selection problem into account. 5 Also after selection is
accounted for, most evaluation studies report a positive effect of the subsidy on the subsidized
The previous literature does not pay attention to the business cycle when evaluating the
(2012). Paunov (2012) studies the likelihood to stop ongoing R&D projects of firms in eight
Latin American countries in response to the global financial crisis. She finds that the
likelihood to stop projects correlates negatively with the receipt of public funding. Paunov
(2012) concludes that public funding schemes are an important means to foster counter-
cyclical investment behavior. Her analysis does not account for a potential selection bias.
A distantly related study investigates the effects of subsidies on R&D investment in the
presence of market uncertainty (Czarnitzki and Toole, 2007). While the economic uncertainty
that firms face during an economic downturn is not the same as product market uncertainty, it
5
Prominent methods that allow controlling for a selection bias are matching estimators (e.g. Czarnitzki and Fier, 2002,
Almus and Czarnitzki, 2003, Czarnitzki et al., 2007, for heterogeneous treatments), instrumental variables methods (e.g.
Wallsten, 2000) and selection models (e.g. Busom, 2000, Hussinger, 2008, for semiparametric versions). Gonzales et al.
(2005) and Takalo et al. (2008) develop structural models to access the effect of subsidies on the subsidized firms.
6
Exceptions are Busom (2000), who finds a partial crowding out effect for Spain and Wallsten (2000), who reports a
substitutive effect of subsidies for the U.S. SBIR program. Gelabert et al. (2008) find differences in the effectiveness of
public subsidies depending on the level of appropriation in the firms industry.
10
is still an interesting finding that R&D subsidies reduce the negative effect of product market
3. METHODOLOGY
Empirical Strategy
Our empirical approach has three different parts. The first part evaluates the effectiveness of
R&D subsidies. In the second part of the analysis we compare the effect of subsidies in the
crisis period to non-crisis years. In the last part of the analysis, we investigate whether the
altered subsidy scheme in the crisis years has led to different effects of subsidies in crisis and
non-crisis years.
R&D spending of the subsidized companies. Since a simple comparison between treated
selection problems, 7 our empirical approach aims at investigating what the treated
observations would have spent on R&D if they would not have received the subsidy, i.e. the
counterfactual situation. This average treatment effect on the treated (ATT) is defined as
follows:
(1) = (1 0 | = 1) = (1 | = 1) (0 | = 1)
where 1 is the R&D spending of the companies having received a treatment and 0 is the
R&D spending of companies that did not receive a subsidy and depicts the actual treatment
(=subsidy) status. This equation illustrates a missing data problem: while we can
7
For details see Blundell and Costa Dias (2008).
11
observe (1 | = 1), i.e. the R&D spending of a subsidized firm, we cannot observe what the
subsidized firm ( = 1) would have spent on R&D without the subsidy (0 | = 1).
Constructing a valid proxy for the counterfactual situation is the main issue in empirical
policy program evaluation. Since it is usually not possible to conduct real experiments,
econometric techniques have been developed that aim at proxying the counterfactual
The DID approach requires panel data with observations before and after (or while) the
treatment. Since more than 50% of the firms in our sample are only observed once, we have to
disregard the DID approach. The reliability of selection models and IV estimators rests on the
availability of at least one valid exclusion restriction or instrumental variable. In our case it is
theory and impacts the likelihood to receive public R&D funding, but does not correlate with
the R&D expenditure of the company. Therefore, we choose a matching method. The
intuition behind the matching approach is to proxy the counterfactual situation, i.e. the
investment of a treated company in the absence of the treatment, by the investment of the
We apply a nearest neighbor propensity score matching. In practice, this means that we match
each subsidy recipient with the single most similar company in the control group of the non-
subsidized firms. The pairs are chosen based on the similarity in the estimated probability of
receiving a subsidy, i.e. the propensity score. Matching on the propensity score avoids a
curse of dimensionality because all information is bundled in the propensity score which is
12
then used as the single matching argument (see Rosenbaum and Rubin, 1983). In addition, we
require that the selected control observation is observed in the same year as the treated
observation. This is crucial for our analysis because we are interested in comparing treatment
effects across years in the second part of the empirical analysis. We further demand that the
control observations are located in the same geographical area in Germany by distinguishing
between Eastern and Western German companies. We do this because the funding likelihood
as well as the infrastructure for innovation differs between the two regions.
The matching estimators main disadvantage is its reliance on the conditional independence
assumption (CIA). This means that the assignment to treatment has to be independent of the
outcomes, in our case the R&D investment, conditional on a set of observable characteristics
() (Rubin, 1977):
(2) 1 , 0 |
with 1 being the outcome of treated companies, 0 being the outcome of non-treated
companies and representing the actual treatment status. The CIA is satisfied if all
information that affect the treatment assignment and the outcome is included in . If so, the
CIA. However, we are confident that our rich set of control variables suffices for the CIA. 8
A further requirement of the matching method is that there has to be sufficient overlap
between the treated and the control group in terms of their propensity to receive a public
subsidy (common support). In order to guarantee common support, we calculate the minimum
8
Similar control variables have been used in a variety of studies that evaluate the effects of R&D subsidies based on similar
datasets employing a matching approach (e.g.Czarnitzki and Fier, 2002, Almus and Czarnitzki, 2003, Czarnitzki et al., 2007,
Czarnitzki and Lopes Bento, 2013).
13
and the maximum of the propensity scores of the potential control group, and delete
observations on treated firms with probabilities larger than the maximum and smaller than the
If the CIA and the common support are fulfilled, the ATT will be identified and consistently
(3) = (1 | = 1) (0 | = 0)
1. Specify and estimate a probit model to obtain the propensity score ().
2. Restrict the sample to common support: delete all observations on treated firms with
probabilities larger than the maximum and smaller than the minimum in the potential
control group (this step is also performed for other observed characteristics that are used
in addition to the propensity score as matching arguments).
3. Choose one observation from the subsample of treated firms.
4. Calculate the Mahalanobis distance between this firm and all non-treated firms in order
to find the most similar control observation: = ( )1 ( )
Z contains the propensity score, the year and a dummy that indicates whether the
company is located in Eastern Germany or not. is the empirical covariance matrix of
the matching arguments based on the sample of potential controls.
5. Select the observation with the minimum distance from the remaining control group (do
not remove the selected controls from the pool of potential controls, so that it can be
used again).
6. Repeat steps 3-5 for all observations on treated firms.
7. Use the matched comparison group to calculate the average treatment effect on the
1
=
treated as mean difference of the matched samples: ( 1 0 ) where
1
0 is the counterfactual for firm and 1 is the sample size of the treated firms. Note
that the same observation may appear more than once in the group of controls.
8. The ordinary t-statistic on mean differences is biased as we perform sampling with
replacement. That is why we correct standard errors by applying Lechners (2001)
estimator for an asymptotic approximation of the standard errors.
14
Part 2: Effectiveness of R&D Subsidies in Crisis and Non-Crisis Years
After having identified the ATT that shows whether the R&D subsidy led to additional R&D
investment by the subsidized companies, we investigate whether the effect of subsidies differs
in crisis and non-crisis years. In order to do so we run a regression of the ATT on a set of time
dummies d.
= + +
(4)
The estimated coefficients of the year dummies indicate whether the treatment effects differ in
times of crisis. There are two different possible scenarios. On the one hand, one can expect
that the subsidies are more effective in the crisis years because firms face more severe
financial constraints so that the subsidy increases R&D investment substantially. On the other
hand, a lower treatment effect can occur in crisis years if firms match the public funds with
less private investments than they would have made in non-crisis years. The latter effect
would be in line with a prediction from real option theory which state that the responsiveness
uncertainty increases the real option value of investments so that firms become more cautious
with regards to their R&D investment decision during recessions (Bloom et al., 2007, Bloom,
2008).
effectiveness of R&D subsidy schemes in crisis and non-crisis years in the German context.
Such differences can be motivated by (a) a different funding policy in crisis times or (b) a
15
(a) During the past crisis direct project funding has been increased in terms of amounts
and number of projects funded. This can have implications on the ATT in crisis years
because if more projects are funded the average quality of the recipient is likely to be
lower than in non-crisis years which could in turn lead to a lower ATT.
(b) Subsidy recipients face financial constraints during the crisis. In response, they might
invest less into the subsidized R&D project than they would have spent in non-crisis
years.
We aim at analyzing whether the change in innovation policy influenced the effect of R&D
subsidies in times of crisis. We do so by comparing first time subsidized firms in crisis and
non-crisis years. In case a lower subsidy effect is caused by a lower quality of funded firms
during the crisis years, we should find a significant difference between these groups of firms
in terms of success predictors like firm size or patent stock. If we do not find evidence for an
effect of an altered subsidy scheme on the quality of the subsidy recipients, hypothesis (b) is
supported.
STATISTICS
database which consists of firm level information and their subsidy records. The firm level
dataset is the Mannheim Innovation Panel (MIP), which is an annual survey conducted by the
Centre for European Economic Research (ZEW) on behalf of the German Federal Ministry
for Education Research (BMBF) since 1993. The MIP is the German contribution to the
European Commissions Community Innovation Survey (CIS) and provides us with most of
16
Information on the Federal Governments project funding is taken from BMBFs PROFI
database. It contains information on all non-military R&D projects funded by the BMBF. The
BMBF funding is the largest source of public R&D funds for the business sector in Germany
and accounts for more than 80% of the total public R&D funding of the business sector. The
direct project funding program is open to all firms located in Germany. The official
application form requires detailed information on the company and its planned R&D projects.
There is a peer review process according to which grants are assigned as matching grants to
the selected projects, which means that applicants have to contribute at least 50% to the
subsidized projects. The government sponsors at most 50% as is prescribed in the funding
guidelines of the European Commission (1996) and in German regulations (BMBF and
BMWi, 2001).
Further data sources comprise the European Patent Office (EPO) which provides us with
firms patent applications since 1979, the credit rating agency Creditreform and the Center for
Economic Studies (ifo). The ifo conducts a business cycle survey on a monthly base. Every
month, close to 7000 (2500) enterprises operating in the industry (services) sector are
surveyed on their assessment of the actual and future business situation. 9 Based on this
information the ifo publishes a yearly business cycle indicator which we use in order to
account for the business climate in specific industries before and during the crisis. Additional
firm information is retrieved from the largest credit rating agency in Germany, Creditreform,
which provides us with firm age information and a credit rating indicator that proxies the
The final sample covers the years 2006 2010 so that we cover the pre-crisis and the crisis
period. We restricted the sample to firms with more than 4 employees and less than 250
9
We downloaded ifos business cycle indicator from Thomson Reuters Datastream, the worlds largest financial database.
17
employees since SMEs are more sensitive to the business cycle. Our sample includes
manufacturing as well as business related service sectors. The final sample consists of 7843
firm-year observations out of which 801 received a R&D subsidy from the BMBF.
Treatment Variable
We measure treatment by a binary indicator that takes on the value 1 if a firm had been
subsidized by BMBF in the respective year. The indicator takes on the value 0 if a firm had
not received any R&D subsidy at all in the respective year, neither from the EU nor from the
Federal Government nor from other sources. Thus, our control group solely consists of non-
subsidized firms, allowing us to rule out side-effects from other subsidy programs.
Outcome Variables
We test the hypothesis of additionality for six outcome variables in order to show robustness
of the results with regards to different definitions of the dependent variable. RD depicts a
firms total R&D expenditure, which is measured in million EUR. PRIVRD is defined as the
private R&D investment, i.e. RD minus the subsidy received. Since these variables are
distributed askew, we employ RDINT (RD over sales) as well as PRIVRDINT (PRIVRD over
sales) as additional dependent variables. In addition, we define RDEMP (RD over number of
Control Variables
Our control variables encompass firm size as measured by the log of the number of full time
employees, lemp. We allow for a possible non-linear relationship by including the square term
of the log of employees, lemp2. We expect that R&D expenditure correlates with firm size
and that, thus, larger firms are also more likely to apply for subsidies and to receive a grant if
18
the government is following a picking the winner strategy. The logarithmic specification is
If a firm is part of an enterprise group, this membership can increase the accessibility to
higher likelihood to apply for a subsidy. Further, governmental evaluators could be prone to
subsidize firms that belong to a network of firms, being aware of potential knowledge
spillovers within the enterprise group due to the subsidized project. We control for firms
belonging to a firm group with a binary variable, group. Firms with a foreign headquarter,
foreign, could, in contrast, be less likely to receive funding because the government might
want to induce economic effects in the own country. The binary variable east indicates
whether a firm is located in Eastern Germany or in the Western part of the country. East
German firms could be more likely to receive a subsidy as this region is still in a catch-up
process with regards to Western Germany. The log of firm age, lage, covers potential firm age
effects.
Firms competing in foreign markets are more innovative than others (Arnold and Hussinger,
2005). Therefore, we also expect export-oriented firms to apply more frequently for R&D
subsidies. Our binary dummy export indicates whether a firm has export sales or not.
To further account for a firms innovation potential and a picking the winner strategy of the
government, we control for a firms past success in creating new knowledge by accounting for
its patent stock. To construct the patent stock, we use patent applications from 1979 onwards
which have been filed at the EPO. The indicator is calculated as a depreciated sum of all these
patent applications until t-1 plus the (non-depreciated) applications in t. The depreciation rate
is set to 0.15 as is common in the literature (see e.g. Hall, 1990, Griliches and Mairesse,
19
1984). Due to collinearity concerns with firm size, the patent stock is divided by the number
of employees, patemp.
To cover potential financial restrictions a firm might have, particularly during the crisis
period, we include Creditreforms credit rating index, credit. 10 This is an index representing a
firms solvency. The index ranges from 100 to 600. The higher the index, the lower is the
credit rating and the ability to attract debt capital. Firms that have more problems to attract
Another characteristic to be considered is the business climate of the industry the firm takes
an active part in. SMEs usually participate only in one or a few product markets. In case of
economic downturns, these firms may not have the opportunity to compensate a serious
decrease in demand in one of their few markets. We control for the business climate the
companies are facing by including ifos index for business situations, busit. The business
situation indicator ranges from -100 to +100, indicating a positive or negative change
compared to the previous period, respectively. We translated the ifos industry classification
to the NACE industry classification at a 2- to 4-digit level using the most disaggregated
industry level.
To avoid potential endogeneity, we lagged all time-variant explanatory variables and consider
Descriptive Statistics
Table 2 shows descriptive statistics, comparing the variables mean values for non-subsidized
and subsidized firms. The significant t-tests indicate systematic differences between
subsidized and non-subsidized firms. For example, subsidized firms score higher on all R&D
10
We also employ a missing value correction. The missing values of credit are set to zero. An additional binary dummy,
creditmiss, that takes on the value 1 if credit equals zero, is included in the estimations.
20
input measures, they have more patents per employee, more employees and are more likely
to be exporters. Further, subsidized firms are younger and are more frequently located in
Eastern Germany.
Subsidized firms on average reveal a higher business situation index which describes that the
industries of the subsidy recipients have experienced a larger upswing as compared to the
previous period than the industries of non-subsidized companies. This suggests that firms are
more likely to apply for and receive a subsidy if the industry is in an upswing. Further, the
21
credit rating between non-subsidized firms and subsidized firms does not differ significantly.
Note that most of the differences hint at a picking the winner strategy of the government
when deciding on subsidy recipients. An exception is the difference with regards to firm
location in Eastern or Western Germany. The higher share of subsidized companies in the
formerly socialist part of the country indicates that the subsidy scheme also aims at fostering
5. EMPIRICAL RESULTS
Funding Propensity
As described in section 3, we employ a matching method to identify the causal effect of the
subsidy treatment. Thus, we have to find non-treated (non-subsidized) observations with the
most similar characteristics to the treated (subsidized) observations. We determine the so-
called nearest neighbors based on the propensity score, i.e. the likelihood of receiving a
subsidy. Therefore, we estimate a probit model for the receipt of public subsidies. Table 3
shows the estimation results. Apart from the dummy indicating membership of a firm group,
the dummy indicating a foreign headquarter and the business situation, each variable reveals
22
Table 3 Probit estimation
firm based on the propensity score and the additional two matching arguments location in
Eastern Germany and year of observation. Due to the common support criterion we have to
drop two observations for which we cannot determine appropriate control observations.
Table 4 shows the mean values for treated observations and controls after the matching. There
no longer exist significant differences between the treated and the non-treated observations
with regards to the control variables indicating that our matching specification is valid.
Significant differences in the mean values of the outcome variables persist and can be given a
23
The subsidized firms reveal a higher R&D activity independent of the definition of the
outcome variable. Thus, we find an overall positive ATT signaling that firms increased their
R&D spending due to the subsidy. We can reject a crowding out. The ATT equals 0.224
(0.141) million EUR in terms of R&D (private R&D) expenditures. The ATT in terms of
R&D (private R&D) over sales corresponds to 7.6% (4.3%) points. For R&D intensity as
defined by R&D over employment the ATT amounts to 0.7% (0.4%) points for R&D (private
R&D).
24
Average Treatment Effects in the Course of Time
In this sub-section we investigate potential changes of the average treatment effect on the
treated over time. Table 5 presents the results of OLS regressions of the ATT on a set of year
dummies. This models constant represents the ATT of the year 2006, our year of comparison.
Table 5 shows that the ATTs in 2006 are positive and significant as expected. As compared to
2006, the ATT in 2009 is significantly lower while the further year dummies are not
statistically significant. This suggests that the beginning of the crisis period had a significant
policy during the crisis or due to an altered firm behavior. Figure 2 depicts the allocation
policy of the BMBF for SMEs over the observed period. In 2006, 1226 projects were granted
with an overall amount of about 221 million EUR. During the crisis, this amount
25
corresponded to 435 million EUR for 1437 granted projects. This shows that the BMBF
increased the number of projects granted as well as the total amount in 2009. In 2010, pre-
crisis levels are achieved. The peak of 2009 could imply that the BMBF subsidized firms of
lower average quality than in the pre-crisis years. If so, this should be visible in the funding
probability.
500000 1500
450000 1450
400000
1400
350000
300000 1350
250000 1300
200000 1437
1250
150000 1359
1323 1200
100000
1226 1224 1150
50000
0 1100
2005 2006 2007 2008 2009 2010 2011
In order to provide a formal test for potential quality differences of subsidy recipients before
and during the crisis, Table 6 presents a probit regression of our control variables on a binary
dummy variable. The dummy takes on the value 1 if the regarded firm has been subsidized by
the BMBF for the first time before the crisis of 2009, it takes on the value 0 if the regarded
firm has been subsidized by the BMBF for the first time after the crisis started. If a first time
subsidy recipient before and during the crisis differed, we would see significant differences in
the firm characteristics. The regression results, however, do not uncover systematic
26
differences between first time subsidy recipients in both periods rejecting the hypothesis of a
quality difference of subsidy recipients. The only significant difference is the business
situation but the estimated coefficient as well as the marginal effect (not presented here) are
negligibly small.
Therefore, we reject that the lower ATT in the crisis year 2009 is caused by systematic
differences between subsidy recipients before and during the crisis. The alternative
explanation for the lower ATT is that it is induced by firms investment behavior. Firms had
to cope with the negative consequences of the financial crisis. They may have allocated the
funds that they would have spent on R&D projects to more urgently needed fields during the
crisis. According to Rammer (2011), firms that indicated the most severe effects of the crisis
27
have been R&D active firms. Since most of the firms in the sample, which received a subsidy
in the past, are R&D active firms it seems to be reasonable that these firms required financial
means to service debt, satisfy long-term orders or to preserve research capacities, e.g. R&D
employment.
6. CONCLUSION
We explore the effects of R&D subsidies during the global financial crisis. In response to the
crisis, most OECD countries experienced a decrease in employment figures and long-run
investments such as the investment in R&D. This can have detrimental long-term
consequences because innovation is one of the major drivers of sustainable growth and wealth
of industrialized countries. Among the OECD countries, Germany stands out with a slight
increase in R&D activities from 2007 until 2009. Germany is also one of the countries that
Our study examines the effects of R&D subsidies on firms R&D spending during the
financial crisis. We start by investigating the average treatment effect on the treated (ATT) of
direct R&D subsidies in Germany during the period 2006-2010. Using propensity score
nearest neighbor matching, we find an overall positive ATT over the observed period. This
means that even in the crisis years R&D subsidies have stimulated additional R&D
investment by the private sector. Further results show that the ATT was - although positive
and significant - lower in the crisis year of 2009. In search for an explanation for this lower
additionality effect, we investigate whether the expansion of the German subsidy program
during the crisis year 2009 has led to the smaller ATT or whether the smaller effect is caused
by a different investment behavior of subsidy recipients in the first crisis year. The extension
of the subsidy program might have caused the average quality of the subsidy recipients to be
28
lower than in the pre-crisis years. This, in turn, could have lowered the average success of the
subsidy program. In order to test this possibility we compare first time subsidy recipients
before and during the crisis. The results show that there are no systematic differences between
these groups of firms. Hence, we conclude that the smaller effect of the R&D subsidy
program is not caused by the extension of the subsidy program in the crisis years but that it is
caused by firm behavior. Firms may have shifted funds that they would have spent on R&D in
non-crisis years to more urgent needs, such as keeping their stock of employees.
The countercyclical innovation policy of the German government is likely to have had a
stabilizing effect for the innovation investment behavior of SMEs helping them to pay the
wages of R&D workers and to start new projects. The decrease in the ATT lasted only for one
year after which SMEs recovered from the first shock of the crisis and returned to normal
29
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